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Home » Investment property » Commercial Property Valuation: How to Evaluate Real Estate’s Potential

Commercial real estate (CRE) investments are properties that are used solely for commercial purposes. Commercial real estate is rented by individuals that intend to do business – as the name implies, it’s all about commerce-related activities. This vast category of real estate can range from retail centers to corporate offices.

CRE can be a lucrative investment, but unfortunately, not all of them will be profitable. When it comes to commercial property valuation, there are several ways to determine whether or not a piece of real estate is a worthwhile investment. Read on to learn how:

Why invest in commercial real estate?

Real estate tends to be a stable investment. It is the type of investment that is not that volatile, making it safer than stocks. CRE, in particular, presents investors with the opportunity to make more money more consistently. Below, we’ve broken down a few of the reasons why you should invest in CREs:

Cash flow

Commercial real estate can provide a consistent cash flow. What’s more, commercial properties generate a greater return compared to other types of properties. This, in turn, protects property investors against volatility, as the real estate market does not tend to move alongside stocks and bonds.

Diversification

Every wise investor understands the value of diversification. Diversification protects you from losses, as they can still benefit from investments in case one investment class faces a downturn. The problem is that traditional investments aren’t varied enough to guarantee great returns even in the event of a downturn. Fortunately, there is a low correlation between CRE and the stock market, so it won’t be that affected.

Value of land

Value of land

Even if property values fall, real estate won’t be worthless. In other words, it will always be valuable. Even if you face tenants that fail to pay their rent on time, or if you have vacancies, you will always have the opportunity to turn your property into a profitable place of business. The investment can never be considered invaluable.

Less demanding in terms of time

Commercial tenants typically close their doors at the end of the day. That means you won’t have to work when they aren’t at work. You won’t have to worry about receiving a call at dawn from a renter who needs repairs. Of course, there may be break-ins and other concerns, but those can be handled by a commercial property management agent.

How to evaluate commercial real estate

Before you buy CRE, be sure to consider whether or not it’s worth your money. If you’re planning to purchase a commercial property, here are a couple of commercial property valuation factors to consider:

History

If the property has already been used as an investment in past years, you will have a wealth of data at your disposal. You’ll be able to tell whether or not it has performed well, or if it’s been a failure. Find relevant information from the previous owners in order to review its performance. Remember that if the property performed badly, the owners won’t tell you this (after all, they don’t want to discourage you), but you will be able to figure that out yourself, or with the guidance of a property management agent.

Location

Location

Where your property is located can affect its performance. Accessibility via roads and railroads, distance to airports, etc. can make or break your commercial investment and its ability to increase in value over time. Location can also determine what types of tenants will rent at your commercial property. So, if you want to rent to a particular type of tenant, ask yourself if they’d be likely to do business there. And even if your property is in a prime location, be sure to look into development plans as infrastructure can impact your property’s profitability.

Market dynamics

CRE does not suffer from the same market fluctuations as other traditional investments such as stocks. However, market movements do have an impact on the vacancy rate, rental rates, and more. An excellent example is the COVID-19 pandemic. The CRE market saw a decrease in commercial office space leases, as more and more companies adopted the work-from-home culture. By keeping tabs on what businesses are the most sustainable, you’ll be able to determine what types of commercial real estate to buy.

Profit opportunities

The amount of money that moves through a real estate investment is the cash flow. Basically, it’s what remains when the expenditures have been deducted from the income. When there’s a positive cash flow, that tells you that more money is going into the property owner. However, when there’s a negative cash flow, that means the property owner is losing money, and that more money is being put into the property.

Be sure to crunch the numbers before you buy a commercial property. An expert property management company should be able to help you calculate the expected cash flow, rate of return, and more.

Tenants

Tenants

You can learn a lot about the commercial property’s viability (i.e. the ability to be profitable) from the types of tenants that you’ll be renting to. Historical data can offer you a wealth of information on how long lease agreements last, as well as how often you’ll have vacancies. For instance, a multi-unit commercial property is less likely to have vacancies than a warehouse that’s targeted toward a particular market.

In addition, be sure to narrow down who your market will be. Do you want your tenant market to be broad, or do you want to rent to a specific type of tenant? An office is an example of commercial property with a broad tenant base because it can be rented to a variety of tenants.

Want to invest in commercial real estate?

With so many factors to consider in commercial real estate, it’s understandable that it can be overwhelming. Fortunately, with the experts at Luxury Property Care, commercial real estate investing can be a no-brainer. We’ll determine whether or not a particular property is a worthwhile investment, or if you should put your money somewhere else. And when you do find your dream property, we’ll help you manage it day-in and day-out, so you can generate consistent yields for years to come.

For more information, contact (561) 944 – 2992 or fill out our contact form today.

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